Why Starbucks must start delivering big-time\n\nI have had a checkered history with Starbucks (SBUX).\n\nAs an analyst during the Howard Schultz CEO era, I would camp out in stores for days studying everything the chain was doing wrong (and right). The stock was always priced for perfection, and I was trying to ensure that clients wouldn't be left holding the bag. My ensuing critical research reports weren't well-received by Starbucks.\n\nI still remember Schultz telling me to f*** off at an analyst day. I wasn't amused in the moment by a billionaire's lack of verbal control, but the next morning, I was back to my chipper self. You can't take this stuff personally.\n\nMore than a decade later, I'm now a journalist with no bones to pick with Starbucks — just one providing context on this important stock.\n\nCurrent Starbucks CEO Brian Niccol is hard to root against. I originally met him at a Taco Bell investor day in New York City, maybe nine years ago. He was a good leader then and a better one today with a successful Chipotle (CMG) turnaround under his belt.\n\nThe problem is that Starbucks' business isn't yet showing the Niccol magic. You can see the seeds he planted beginning to sprout — service times improving, sales not falling off a cliff, menus streamlining. In the quarter announced this week, the company teased a \"wave\" of innovation such as protein cold foam coffee, shorter mobile order pickup times, and a potential sale of part of the struggling China business.\n\nBut again, Niccol's magic beans have barely sprouted green shoots, with Niccol almost one full year into the job.\n\nWhat Starbucks delivered in the quarter:\n\nOperating profit margins crashed in every business segment year over year.\n\nOverall operating margins plunged 660 basis points from a year ago.\n\nUS same-store sales fell 2% on the back of a 4% traffic drop.\n\nEarnings per share tanked 46% from a year ago.\n\nNo guidance provided.\n\n\"Unfortunately, I think there were some choices made before me that really set us back on our ability to create that great customer connection between our barista and customer and provide the type of customer service that the Starbucks brand, frankly, is known for,\" Niccol told me on Yahoo Finance's Opening Bid (watch above).\n\nSome investors are clinging to the positives Niccol noted during the earnings call.\n\nThey include low double-digit percentage same-store sales growth at college locations, improved transaction trends in the US toward the end of the quarter, and the aforementioned \"wave\" of menu innovation. Starbucks will also spend $500 million during the next year on increased labor investments — shy of Street whispers of about $1 billion.\n\nThe company even teased the potential to reach peak operating margins again.\n\nBut at this point, investors should be questioning when the inflection moment is in Starbucks' business, and what that inflection actually looks like. The turnaround wasn't in the just-completed quarter. It is unlikely to be the current quarter. Then, mix in high tariffs on coffee beans (including a 50% rate on Brazilian imports) and cautious US consumers.\n\nThe stock has dropped 9% over the past week. But the valuation may still be too caffeinated.\n\nShares trade on a price-to-earnings multiple of 31x forward earnings estimates as investors price in a Niccol-led comeback. That's asking a lot in the economic climate and against the backdrop of competitors like Dutch Bros. (BROS), Luckin (LKNCY), and countless others serving premium coffee.\n\n\"More questions than answers ahead as investments into the biz stacking up and only some early signs of progress being made so far; we think downside risk is under-appreciated and rate the stock Underperform,\" Jefferies analyst Andy Barish wrote in a note.\n\nI worry Niccol has set the bar too high for short-term results, risking a letdown for hopeful investors if there isn't a clear inflection next quarter.

Why Starbucks must start delivering big-time

The article discusses Starbucks' challenges under CEO Brian Niccol, highlighting declining financial performance, including operating profit margin drops, US same-store sales declines, and earnings per share reductions. It examines the CEO's past experiences, current innovation efforts, and investor concerns about the company's turnaround progress, while noting the stock's recent price drop and analyst skepticism about its future performance.